Democrats push economic policy

KEVIN G. HALLMcClatchy Newspapers

Published Sunday, February 18, 2007

WASHINGTON -- Democrats in Congress are moving quickly to impose their economic agenda now that they've returned to power on Capitol Hill. They're shrugging off strong macro-economic indicators to spotlight sluggish wage growth and a rise in mortgage defaults, and they're even pressuring the Federal Reserve to lower interest rates.

Many Democrats campaigned against the trend of widening income inequality, and they're trying to make good on promises to push economic policy to better serve the poor and middle classes.

Democrats don't dispute that 4.8 percent unemployment is near historic lows. And they acknowledge that the economy continues to grow at nearly its potential, despite a housing recession.

Even so, they're homing in on narrower issues, such as a rise in mortgage defaults by holders of sub-prime loans, who tend to be minorities and working-class Americans. And they're addressing the job insecurity and general unease many Americans feel over how much the global economy now influences the U.S. economy.

"They're trying to tap into pockets of discontent," said Brian Bethune, chief U.S. economist for Global Insight, a consultancy in Lexington, Mass. "From a point of view of the economy as a whole, the performance of the economy has been exceptional."

Democrats feel that working Americans aren't fully sharing the benefits. Their agenda was on clear display Thursday.

Sen. Charles Schumer, D-N.Y., and a group of freshmen senators introduced a bill promoting what they called middle-class tax cuts. It includes a new tax credit for care of elderly family members and expanding the child tax credit.

Over at the Senate Finance Committee, Chairman Max Baucus, D-Mont., grilled U.S. Trade Representative Susan Schwab and called for new federal assistance programs to aid service-sector workers displaced by globalization. This "globalization adjustment assistance" would expand programs that help workers who've lost factory jobs to cheaper labor overseas.

In the House of Representatives, Financial Services Committee Chairman Rep. Barney Frank, D-Mass., accused Federal Reserve Chairman Ben Bernanke of a bias toward high lending rates that hurt working Americans.

Just a day earlier before the Senate Banking Committee, Bernanke sparked a stock-market rally by suggesting that inflation pressures were moderating and that economic growth was rebounding. But Bernanke hinted that the Fed is likely to maintain its benchmark lending rate at 5.25 percent -- where it's been since August -- to guard against inflation in case growth proves stronger than expected.

"If you think it might be more than you think, why did you think it?" Frank asked in a testy exchange. "It does seem a little odd for you to say, 'Here's what I think, but it might be worse than I think.' That is literally double-think."

Bernanke held to his view that inflation poses a threat, but he did give ground to Frank on another key Democratic point. He said that there's ample room for businesses to offer higher wages without having to raise prices.

Democrats are holding hearings about excessive CEO pay, contrasting that with several years of flat wage growth for workers despite high corporate profits.

The Fed chairman also was grilled on whether predatory lending explains the rise in sub-prime mortgage defaults. The Fed issued new guidelines last year for lenders and borrowers about creative loans that are getting people into homes they previously couldn't afford.

Pressed by Democrats, Bernanke said he would reissue those guidelines to include so-called "2/28 mortgages," which offer a low fixed rate for two years, then adjust annually for the next 28 years. These loans, often offered to minorities and working-class Americans, could leave borrowers with mortgage rates of 13 percent or more.

Bernanke said that a new federal standard defining predatory lending might be necessary, but he added that it should come only after states tried to define and test such standards.

SUB-PRIME LOANS

Sub-prime mortgages are given to borrowers with spotty or nonexistent credit records. They involve higher interest rates for borrowers, reflecting the higher risk that lenders assume. Minorities and working-class Americans are the primary holders of sub-prime loans.

New housing data this month showed a surge in default rates on some of these loans, primarily those that rise with lending rates. The Mortgage Bankers Association reported that 3.8 percent of all adjustable-rate sub-prime mortgages are in foreclosure proceedings, up from about 3 percent in 2005, but well below the 9 percent rate following the 2001 recession.

Sub-prime adjustable-rate mortgages make up less than 7 percent of all mortgages. Across all types of mortgages -- fixed, adjustable, prime and sub-prime -- about 4.67 percent of loans are in foreclosure proceedings, up slightly from a few years ago but not alarming.